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    April 8, 2021

    Ideas for building a better county tax system

    This article appears in the Michigan Counties newsletter of the Michigan Association of Counties

    If we were creating county government today, we would likely design governance, revenue, and service structures different from the current model. We would design a tax structure that reflects the economies in which they operate. 

    We wouldn’t rely so heavily on the property tax. Collectively, counties have more tax options than any city or township not named Detroit, but the real estate transfer, hotel/motel, and Wayne County’s car rental taxes are so minor as to be insignificant, which doesn’t leave a lot of options. 

    An ideal tax structure produces revenue sufficient to provide services, with components that respond to economic growth and components that are stable through the economic fluctuations. It does not create administrative burdens and does not disrupt economic choices. Property taxes provide a stable revenue source, but they are insufficient to fund county services. They are burdensome because they are the primary revenue source for all types of local governments. They are also restrained from responding to economic growth by Michigan’s tax limitations. 

    A tax structure with options to add sales and income taxes would better achieve that ideal. Each is capable of raising significant revenues on its own. Diversity would allow for growth and stability. 

    Sales (and use) taxes capture the economic activity that defines many regions. Northern counties would benefit from tourism activity and urban counties from the retail trade. 

    Income taxes capture the economic strength of each county. It rewards successful business attraction and community development. 

    The peril of a diversified tax structure is that the smaller the taxing jurisdiction, the greater the economic competition. No county would want to be the first to levy a sales or income tax lest it cause an out-migration of business and/or cause changes in purchasing habits. Michigan’s constitutional requirements for voter approval of new taxes make this a gambit few elected officials are eager to engage in and precludes the state from mandating a tax be levied by all counties. 

    The peril of a diversified tax structure is that the smaller the taxing jurisdiction, the greater the economic competition.

    Nonetheless, the state government can play a key role by levying taxes on behalf of counties. This creates a uniform rate and creates economies of scale in the administration of the tax. 

    Michigan had such a system for many years. Sales, income, business, and intangible property taxes were levied on behalf of local governments until 1998 when tax revenue sharing was consolidated into the sales tax. Since this consolidation, economic hardship and the short-term memory created by term limits led statutory revenue sharing to be cut drastically. Too often it is viewed by state policymakers as revenue that can be appropriated to local governments or used to fill state budget holes.

    The current system can be improved upon. State policymakers have to recognize the benefits of levying taxes on behalf of local governments and commit to it.  And when funded, the revenue should be distributed in a manner that either reflects the economic activity (point of sale for the sales tax or place of employment for the income tax) or achieves a state purpose. Per capita distributions achieve neither. 

    The state purpose is to insure that counties, as administrative arms of the state, have the fiscal capacity to provide a minimum level of services. A distribution system that addresses fiscal capacity will reflect both counties’ revenue-raising ability and their cost drivers. The clerk’s or treasurer’s responsibilities do not vary significantly among counties. On the other hand, workloads of the courts, prosecuting attorneys, sheriffs, register of deeds, and drain commissions may vary in relation to places served. 

    Michigan’s local government revenue structure could be improved in many ways. It cannot be done without state action; either to authorize new taxes or to fund and improve state revenue sharing. 

    President

    About The Author

    Eric Lupher

    President

    Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

    Ideas for building a better county tax system

    This article appears in the Michigan Counties newsletter of the Michigan Association of Counties

    If we were creating county government today, we would likely design governance, revenue, and service structures different from the current model. We would design a tax structure that reflects the economies in which they operate. 

    We wouldn’t rely so heavily on the property tax. Collectively, counties have more tax options than any city or township not named Detroit, but the real estate transfer, hotel/motel, and Wayne County’s car rental taxes are so minor as to be insignificant, which doesn’t leave a lot of options. 

    An ideal tax structure produces revenue sufficient to provide services, with components that respond to economic growth and components that are stable through the economic fluctuations. It does not create administrative burdens and does not disrupt economic choices. Property taxes provide a stable revenue source, but they are insufficient to fund county services. They are burdensome because they are the primary revenue source for all types of local governments. They are also restrained from responding to economic growth by Michigan’s tax limitations. 

    A tax structure with options to add sales and income taxes would better achieve that ideal. Each is capable of raising significant revenues on its own. Diversity would allow for growth and stability. 

    Sales (and use) taxes capture the economic activity that defines many regions. Northern counties would benefit from tourism activity and urban counties from the retail trade. 

    Income taxes capture the economic strength of each county. It rewards successful business attraction and community development. 

    The peril of a diversified tax structure is that the smaller the taxing jurisdiction, the greater the economic competition. No county would want to be the first to levy a sales or income tax lest it cause an out-migration of business and/or cause changes in purchasing habits. Michigan’s constitutional requirements for voter approval of new taxes make this a gambit few elected officials are eager to engage in and precludes the state from mandating a tax be levied by all counties. 

    The peril of a diversified tax structure is that the smaller the taxing jurisdiction, the greater the economic competition.

    Nonetheless, the state government can play a key role by levying taxes on behalf of counties. This creates a uniform rate and creates economies of scale in the administration of the tax. 

    Michigan had such a system for many years. Sales, income, business, and intangible property taxes were levied on behalf of local governments until 1998 when tax revenue sharing was consolidated into the sales tax. Since this consolidation, economic hardship and the short-term memory created by term limits led statutory revenue sharing to be cut drastically. Too often it is viewed by state policymakers as revenue that can be appropriated to local governments or used to fill state budget holes.

    The current system can be improved upon. State policymakers have to recognize the benefits of levying taxes on behalf of local governments and commit to it.  And when funded, the revenue should be distributed in a manner that either reflects the economic activity (point of sale for the sales tax or place of employment for the income tax) or achieves a state purpose. Per capita distributions achieve neither. 

    The state purpose is to insure that counties, as administrative arms of the state, have the fiscal capacity to provide a minimum level of services. A distribution system that addresses fiscal capacity will reflect both counties’ revenue-raising ability and their cost drivers. The clerk’s or treasurer’s responsibilities do not vary significantly among counties. On the other hand, workloads of the courts, prosecuting attorneys, sheriffs, register of deeds, and drain commissions may vary in relation to places served. 

    Michigan’s local government revenue structure could be improved in many ways. It cannot be done without state action; either to authorize new taxes or to fund and improve state revenue sharing. 

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    President

    About The Author

    Eric Lupher

    President

    Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

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